Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 50841-BY

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL FINANCE CORPORATION

COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT

FOR

THE REPUBLIC OF BELARUS

NOS-FY 11

October 27,2009

Ukraine, Belarus, Moldova Country Management Unit Europe and Central Asia Region

International Finance Corporation Central and Eastern Europe Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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The date of the last Country Assistance Strategy was November 7,2007

Vice President: Country Director: Task Team Leaders:

AAA AP BAT BBSB BEE BEEPS

IBRD IFC Philippe H. L e Houerou Martin Raiser Snezana Stoiljkovic Suzy Yoon-Yildiz, Ivan Velev

Jyrki Koskelo

Oksana Nagayets, Craig Bell

CAS CASPR

CEM CIS DPL EBRD

EIB ESW EU FDI FSAP GDP GNI GTFP IBRD

IDF IFC

CURRENCY EQUIVALENTS Belarus Ruble (BYR)

July 2009: USDl = BYR 2.86

FISCAL YEAR (January 1 to December 3 1)

ABBREVIATIONS AND ACRONYMS

Analytic & Advisory Activities Administrative Procedures Best Available Technology Belarus Bank for Small Business Business Enabling Environment Business Environment and Enterprise Performance Survey Country Assistance Strategy Country Assistance Strategy Progress Report Country Economic Memorandum Commonwealth of Independent States Development Policy Loan European Bank for Reconstruction and Development European Investment Bank Economic and Sector Work European Union Foreign Direct Investment Financial Sector Assessment Program Gross Domestic Product Gross National Income Global Trade Finance Program International Bank for Reconstruction and Development Institutional Development Fund International Finance Corporation

IFIs IMF IPCC

LITS MIGA MSMEs

NBRB OSCE

PCRP PEFA

PFM PSED

ROSC

SBA SIRP SMEs SOEs TA UMIC WBG WTO

International Financial Institutions International Monetary Fund Intergovernmental Panel on Climate Change Li fe in Transition Survey Multilateral Investment Guarantee Agency Micro, Small and Medium-Size Enterprises National Bank of the Republic of Belarus Organization for Security and Co- operation in Europe Post-Chernobyl Recovery Project Public Expenditure and Financial Accountability Public Financial Management Program of Social and Economic Development Auditing and Accounting Report on Observance o f Standards and Codes IMF Stand-by Arrangement Social Infrastructure Retrofitting Project Small and Medium Enterprises State-owned Enterprises Non-Lending Technical Assistance Upper-Middle Income Country World Bank Group World Trade Organization

The CASPR was prepared under the guidance of Country Director, Martin Raiser, and Country Program Coordinator, Connie Luff, with overall direction from the ECA Chief Economist, Indermit Gill, and Lead Economist, M. Willem van Eeghen. The CASPR team included Elena Klochan, Ir ina Oleinik, and Yulia Snizhko and contributions are gratefully acknowledged from Maha Armaly, Marina Bakanova, Kevin Barnes, Craig Bell, Lawrence Bouton, Matthias Grueninger, Elena Kladova, Mario Marchesini, Rekha Menon, Oksana Nagayets, Dejan Ostojic, Alexander Pankov, Katerina Petrina, Pablo Saavedra, Pekka Salminen, Andreas Schliessler, Alexander Sharabaroff, Marius Vismantas and Tevfik Yaprak, including guidance on the results framework by Keta Ruiz (ECA Quality). Administrative support was provided by Olesya Gafurova, Larysa Hrebianchuk and Cathrvn Summers and translation sumort bv Irina Trukhan.

FOR OFFICIAL USE ONLY

Country Assistance Strategy Progress Report Republic of Belarus

TABLE OF CONTENTS

A. INTRODUCTION ........................................................................................................................... 1 B. COUNTRY CONTEXT .................................................................................................................. 2 C. RECENT ECONOMIC DEVELOPMENTS. ................................................................................. -3 D. PROGRESS TOWARDS CAS OUTCOMES ................................................................................ 6 E. ADJUSTMENTS TO THE CAS .................................................................................................... .9 F. RTSKS AND MITIGATION ......................................................................................................... 1 1

Boxes Box 1 : Key Economic Vulnerabilities ....................................................................................................... ..4 Box 2: Key Country Results Achieved During the CAS Period ................................................................. 6 Box 3: Results o f IFC Advisory Services in Belarus .................................................................................. 7

Tables Table 1: Main Macroeconomic Indicators, 2003-08 ................................................................................... 3 Table 2: External vulnerability indicators .................................................................................................. .4 Table 3: Gross external debt as o f July 1 , 2009 ........................................................................................... 4 Table 4: Belarus: Medium-Term Economic Projections, 2009-13 .............................................................. 5 Table 5: Changes in the Indicative IBRD Lending Program for FY08-11 (USD m) ................................. .9

Figures Figure 1 : Belarus vs. ECA Average, Growth Rate vs. EBRD Transition Index, 1998-08 .......................... 2 Figure 2:Belarus vs. ECA Average in PEFA Ratings, 2008 ....................................................................... 8

Annexes

Annex 1: Annex B1: Annex B2: Annex B3: Annex B3: Annex B4: Annex B5: Annex B6: Annex B7: Annex B8: Annex B8:

CAS FY08-11 Revised Results Matrix and Progress To Date Belarus at a glance Selected Indicators o f Bank Portfolio Performance and Management IBFWIDA Program Summary IFC Investment Operations Program Summary o f Nonlending Services Social Indicators Key Economic Indicators Key Exposure Indicators IFC Committed and Disbursed Outstanding Investment Portfolio Operations Portfolio (IBRD/IDA and Grants)

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

BELARUS

COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT

A. INTRODUCTION 1. This Country Assistance Strategy Progress Report (CASPR) for Belarus reviews the implementation of the NO8-11 Country Assistance Strategy (CAS) at mid-term. The CAS defined a selective World Bank Group (WBG) program built on priorities from Belarus’ medium-term development agenda, the Program of Social and Economic Development (PSED) for 2006-1 0, and comprised two pillars: Delivering Global Goods and Facing Transition and Shock through Competitiveness and Inclusion. Analytic and advisory activities (AAA) were a core element to support both pillars with modest levels o f investment lending to buttress the Government’s public investment program in improving energy efficiency, water supply quality, waste management, and infrastructure in Chernobyl-affected areas under the umbrella o f the Global Goods pillar. IFC lending supported private-sector development within the Competitiveness pillar. Originally, no development policy lending was envisioned, however, it was planned to review lending parameters under the CASPR in the context o f progress in structural reforms.

2. While the overarching objectives of the CAS remain relevant and aligned with the Government’s development plans, significant changes in the external environment, together with an acceleration in the pace of structural reforms in Belarus, call for a revision in the program of support planned in the CAS. In late 2007, the Belarusian authorities embarked on a process of gradual economic liberalization, the pace o f which accelerated with external shocks the country confronted as a result o f the global economic and financial crisis. These efforts and the approval of an International Monetary Fund (IMF) Standby-Arrangement (SBA) of USD3.52 billion have opened up the possibility for development policy as well as investment lending beyond the scope originally envisioned in the CAS. Correspondingly, the authorities have requested a broader scope and larger size of WBG assistance. This CASPR responds to this request and to the window of opportunity to deepen engagement with Belarus, particularly through a Development Policy Loan (DPL), noting however the significant risks of this approach and the need to carefully review the results achieved at the end of the CAS period.

3. As the Bank’s engagement with Belarus deepens, the dialogue on Governance and Anti-Corruption (GAC) is expected to intensify. The approach to GAC in the CAS consisted of: (a) advocacy for reforms on governance and measures to address corruption, (b) deepened engagement in areas such as public finance management (PFM) in which the government and Bank have common goals, and (c) ensuring that appropriate fiduciary oversight i s applied to proposed resource transfers from the Bank. This approach remains appropriate but will be extended in line with the broader engagement proposed. Discussions will continue on improving governance in Belarus as the authorities aspire to improve their international standing in order to deepen relations with the international community and to attract potential investors.’ Partnership with other donors will be sought to leverage this dialogue. Moreover, with the help of an expanded presence in Minsk through the newly- appointed Resident Representative, the Bank will expand its outreach to a broader group of stakeholders. PFM will remain a focus area for deepened engagement, and the dialogue will be broadened through planned AAA on the efficiency of public finances more generally (including spending, revenue and debt management). A 2007 internal review of fiduciary risks in Bank projects concluded that the Bank’s ring-fencing of operations provides adequate assurance that funds are being appropriately used. The Public Expenditure and Financial Accountability

’ Due to methodological differences, time lags, and limitations in data sources, different governance indices can vary significantly on ranking the quality o f governance in Belarus. While Belarus ranks low on all dimensions o f the Worldwide Governance Indicators 1996-2008, Belarus ranks relatively well in the Business Enterprise and Environment Performance Survey (BEEPS) Anticorruption in Transition Series 1-3 for state capture and administrative corruption, and in Doing Business 2008-20 10 for improvements in the regulatory environment. These inconsistencies require further investigation and wi l l form part o f the overall future dialogue with the Government.

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(PEFA) Assessment conducted in 2008 demonstrates strong performance of PFM in Belarus, and early findings of a fiduciary risk assessment conducted in 2009 indicate the potential to use parts of the PFM system for future Bank-financed investment lending operations.

B. COUNTRY CONTEXT

4. With a Gross National Income (GNI) per capita of USD5,3802, Belarus i s an upper-middle income country (UMIC) that has delivered results in many dimensions of its development agenda. Belarus has been the Commonwealth of Independent States’ (CIS’) top performer in economic growth, energy efficiency improvements, and containment of the HIV/AIDS epidemic. The state provides good public services with a high level of access by CIS standards. I t has maintained its tradition of high human development indicators3 and gender equality4 as measured by international ranking indices.

5. However, Belarus’ cautious and slow approach to reform to date has limited FDI inflows as well as the support from International Financial Institutions ( IF Is ) and Belarus’ growth model faces growing constraints going forward. Belarus ranks low on the European Bank for Reconstruction and Development (EBRD) transition index and state control over the economy remains pervasive. I t s economy remains highly dependent on CIS markets and the level o f foreign direct investment (FDI) has been modest. Belarus’ economic growth, while impressive to date, may face increasing constraints going forward due to the limited flexibility o f i t s economy, low levels of technological innovation, and Russia’s policy o f bringing energy prices to market levels (see Section C, Box 1). The slow reform path also limited the availability of assistance from I F I s in the past. In recognition o f these constraints, in late 2007 Belarus began to liberalize its economy, a process that has accelerated with the economic crisis. 5

Figure 1: Belarus vs. ECA Average, Growth Rate vs. EBRD Transition Index, 199848

3 50 Belarus: S t r o n g Growth, M o d e s t R e f o r m s

I 2 50 c . L

10 - . _ _ _ - - -. -

-5 0 00 - * - Belarus real GDP growth - Tmnsltlon cconornler w g GDP growth Belarus EBRD WE tnnrltlon Indlcator Transltlon econornlei EBRD W E tnnrltlon Indlcator

.I__j -

World Bank 2008, Atlas method, current USD. Belarus ranked highest amongst CIS countries at #68 under the category of “High Human Development” by the United

World Economic Forum Global Gender Gap Index ranked Belarus #23 in 2007 and #33 in 2008. Nations Human Development Index 2009.

’ More information on Belarus’ growth model and i ts limitations can be found in the Program Document for the Development Policy Loan prepared in conjunction with this CASPR. A detailed analysis, using available sectoral and fm-level data wil l be presented in the Economic Policy Notes to be finalized later in FY10.

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6. I n parallel with the process of economic liberalization, Belarus has improved relations with the European Union (EU) while balancing its traditional ties with the CIS. In May 2009, Belarus was invited to participate in the Eastern Partnership which strives for closer economic and political ties between the EU and i t s six eastern neighbors (Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine), and sanctions imposed in the wake of concerns by European institutions and the Organization for Security and Cooperation (OSCE) over the protection o f civic and political rights in Belarus have been suspended since October 2008. At the same time, plans have been progressing to create a customs union with Russia and Kazakhstan and synchronize talks amongst the three countries to concurrently accede to the World Trade Organization (WTO).

C. RECENT ECONOMIC DEVELOPMENTS

7. Belarus was the first country in the CIS to return to growth in 1996 with sizeable growth rates averaging 9 percent since 2003, however, the primary drivers of this growth, particularly highly-discounted energy import prices from Russia, have abated. In 2003, energy subsidies from Russia were estimated at 6.4 percent of GDP due to: (a) natural gas prices below European export parity and (b) an export-duty waiver on crude imports to Belarusian refineries.6 These subsidies combined with a commodity price boom benefitting Belarus’ major exports (e.g., o i l products and fertilizers) led to substantial improvements in the country’s terms of trade. Strong growth in partner countries further fuelled export demand. The centralized economic system distributed these gains across the economy through higher wages and transfers, leading to increased domestic consumption and a significant fall in poverty to 6.1 percent in 2008 and in extreme poverty to 1.6 percent in 2007. With a Gini coefficient of 25.3 in 2007, Belarus i s amongst the most income-equal countries in the world. However, given the projected slowdown in growth (see Table 4), poverty i s expected to increase.

Table 1: Ma in Macroeconomic Indicators, 2003-08

Real GDP (change in percent) Real Industrial Production (change in percent) CPI, e.0.p. (change in percent) Real Effective Exchange Rate, y/y percent change

(+ denotes depreciation) Terms o f Trade (change in percent) Current Account Balance (percent o f GDP) Foreign Exchange Reserves (USD billions)

Net FDI (USD billions) Budget Revenues (percent GDP) Budget Expenditures (percent GDP) Fiscal Balance (percent of GDP) PPG Debt (percent o f GDP)

In months o f imports o f goods and services

o f which: Domestic External

Memo: Nominal GDP (in billions o f USD) GNI per capita (USD, Atlas method) Sources: National Statistic, JMF, WB

2003 7.0 7.1

25.4

-2.9 0.04

0.5 0.5 0.2 45.8 47.5 -1.7 10.4 5.9 4.5

17.8 1610

-2.4

- 2004 11.4 15.9 14.4

-2.1 2.2 -5.2 0.8 0.5 0.2

46.9 46.8 0.0 8.9 5.7 3.2

23.1 2150

-

-

2005 9.4 10.5 7.9

-0.1 12.3 1.4 1.3 0.9 0.3

47.4 48.0 -0.7 8.3 5.7 2.6

30.2 2780

2006 10.0 11.4 6.6

-2.0 3.8 -3.9 1.4 0.7 0.4

49.1 47.6 1.4 8.8 6.5 2.3

37.0 3470

2007 8.6 8.7 12.1

-4.5 -2.5 -6.8 4.2 1.6 1.8

49.5 49.0 0.4 11.6 6.4 5.2

45.3 4220

2008 10.0 10.8 13.3

-1.1 11

-8.4 3.1 0.9 2.1 51.0 49.6 1.4 13.7 6.8 6.9

60.3 5380

8. Starting in 2007, financial pressures began to mount due to sharp decreases in Russian energy subsidies and growing competition in external markets, culminating in 2008 with the onset of the global

The IMF reports even higher levels o f subsidies in 2006, above 10 percent o f GDP, as export parity prices for gas had substantially increased.

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financial and economic crisis. The declining terms of trade from hikes in energy prices worsened with sharp declines in export prices and demand as the crisis hit Belarus’ major trading partners in 2008. External payment difficulties arising from Belarus’ debt maturity structure and limited international reserve cover were exacerbated by limited access to financing resulting from the crisis. The crisis exposed Belarus’ structural vulnerabilities (see Box 1). The authorities’ recognition of these vulnerabilities spurred reforms anchored in the SBA and DPL since late 2008. However, Belarus’ external adjustment remains incomplete thus far and macroeconomic risks remain considerable. These and other risks are discussed in detail in Section F.

Box 1: Key Economic Vulnerabilities

Inflexible exchange rate regime, structure of external debt, and low level of international reserves. Although gross external debt has been relatively low at about 25 percent of GDP in 2008, more than half o f it i s short-term. In spite of attempts to build up international reserves, at mid-2009 their levels remained low-around one of month of imports or less than 40 percent of short-term external debt-leaving little scope to defend the currency peg. ,

High reliance on energy subsidiesfrom Russia. Even after tripling in 2007-09, Belarus enjoys relatively low gas import prices. Future expected price increases will put further adjustment pressures on the economy.

High and increasing concentration of output, tax base, and exports. The 10 largest companies are responsible for almost 40 percent of total industrial output, 25 percent of consolidated budget revenues, and more than 50 percent of total exports-quivalent to over 75 percent of exports to non-CIS countries. Dependence on such few exports increases Belarus vulnerability to terms-of-trade shocks.

Limited Private Sector. The private sector accounts for just 30 percent o f GDP and despite recent improvements, the playing field between state-owned enterprises (SOEs) and private companies remains far from even, especially regarding access to resources. The lack of a more vibrant private sector reduces the flexibility of the economy and its capacity to adjust quickly to external shocks.

Large size of the government and system of state support. A high tax burden accounting for almost half o f GDP supports massive tax benefits and subsidies for enterprises which are generally less efficient than the flagship SOEs, undermining competition and productivity improvements. The volume of government support granted on an individual basis to companies was reduced from 2.5 percent of GDP in 2006 to 1.7 percent of GDP in 2008. However, these figures do not include the full cost of broader schemes of state support, for example directed lending and tax expenditures.

Fragil ity and distortions in the banking system. Pervasive government influence continues to constrain Belarusian banks. Significant public ownership (about 80 percent of total assets), the large share of directed (or ‘recommended’) lending and the

Table 2: External vulnerability indicators

2W7 2 0 8 2WH1 Reserves exludmg gold ($US d o n s ) 4,182 3,061 2,650 Reserves cover ofmrchandise unports (months 1 6 0 9 I 0 Reserves to M2 (%) 385 224 237 Reserves to Amt+Short tenndebt ( O h ) 505 377 Short tenndebt to totaldebt (99) 63 546 504 b e m a 1 debt to exports (%) 459 409 External debt service to eqorts (%) 3 1 0 5 Amortization (US$ d o n s ) 414 173 Foreign bank loan comtments ($US d o n s ) 233 330 0 0 IBRD debt outstandlng ($US d o n s ) 42 42 44

Table 3: Gross external debt as of July 1,2009

US$ million % GDP Gross external debt position 17624.2 34.9 Total long-term General Government Monetary Authorities Banks Other sectors Total short-term Monetary Authorities Banks Other sectors ltercompany lending Forex Reserves as % o f short-term debt

8740.5 4497.6 882.8 1799.7 1560.1 8883.7 202.1 1349.1 6617.4 715.1 29.8

17.3 8.9 1.8 3.6 3.1 17.6 0.4 2.7 13.1 1.4

attendant administrative controls reduce incentives for effective risk management, allowing many non-viable (public) enterprises to survive and weaken bank balance sheets.

9. While Belarus will likely contain the contraction of GDP to around 1 percent in 2009-a less pronounced decline than its neighbors-this has been accomplished through continued lending by state- owned banks. Belarus cushioned the potential crisis shocks on domestic demand initially at the expense of dwindling reserves and subsequently by securing external bilateral7 and IF1 financing. Without a curtailment of credit expansion, Belarus will continue to face external financing risks. Growth i s projected to resume in 2010 at

A USD2 billion stabilization loan was granted by Russia for 2008-09. USDl billion was disbursed on November 18,2008 and an additional USDSOO million in March 2009.

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levels below those preceding the crisis as capital markets are likely to remain risk averse and domestic investment likely to grow at a moderate pace.8

Table 4: Belarus: Medium-Term Economic Projections, 2009-13

Nominal GDP, BRB trillion Real GDP, % growth Consumption, % growth Fixed Investment, % growth Export, % growth Import, YO growth GDP deflator, % growth CPI, % eop growth Current Account Balance, % GDP Terms of Trade, % change

Budget Revenues, YO GDP Budget Expenditures, % GDP Fiscal Balance, % GDP External debt, % GDP PPG debt, % GDP IMF SBA (net credit), % GDP

Source: WE3 staff projections.

2009

140.0 -1.0 -6.3 6.2 -6.1 -8.6 9.8 11.8 -9.2 -3.4

43.5 45.2 -1.7 41.4 27.5 5.6

2010

154.8 2.0 4.1 1.2 3 .O 0.7 8.4 8.7 -6.3 1.8

43.3 45.1 -1.8 43.7 29.1 1.3

201 1

173.1 4.0 2.9 6.3 4.0 3.3 7.5 7.8 -5.1 0.5

42.7 44.7 -2.0 42.2 28.2 0.0

2012

196.0 6.0 5.1 7.1 5.0 4.7 6.8 7.1 -4.7 0.6

42.4 44.3 -1.9 39.5 25.0 -1.1

2013

221.4 6.0 5.5 7.0 5.1 5.2 6.6 6.6 -3.9 0.8

41.9 43.7 -1.8 35.5 20.2 -2.3

10. Belarus has made progress on meeting the conditions of the IMF SBA (USD3.52 billion) approved in January 2009.9 Progress on the key elements o f the SBA includes: (a) an upfront 20 percent exchange rate adjustment and adoption o f a more flexible exchange rate regime; (b) fiscal tightening with a balanced central budget, and (c) launching o f structural reforms. Lending by state owned banks continued at a high rate in the first half o f 2009, but this i s now being curtailed, as credit policy i s tightened. Net reserve targets under the M F SBA for end September were met. Under the aegis o f the DPL, the Bank has been working with the authorities on measures in liberalizing prices, reducing entry barriers, hardening budget constraints, and enhancing social protection. The authorities have expressed their desire for continued Bank support to further implement their reform agenda in the medium term.

1 1, The European institutions have stepped up their assistance to Belarus based on improvements in the economic and political spheres. The EU i s preparing a Macro-Financial Assistance (MFA) package for Belarus. The EBRD has increased its investment program by USDSO mill ion for 2009 and i s in the process o f developing a new strategy for 2010-12 that would broaden the scope o f i ts future program. Future lending from the European Investment Bank (EJB) i s being considered. The Belarusian authorities have signaled their readiness to proceed further with reforms to deepen ties with the European institutions and the international community. At the same time, discussions are ongoing with the Russian Federation over the provision o f the final installment o f a USD2 bil l ion bilateral loan. The Russian authorities have indicated that financial assistance going forward may be provided under the auspices o f the Eurasian Development Bank in coordination with the F I s .

* Section C of the DPL Program Document discusses the assumptions underlying growth projections in detail.

upon completion o f the first review. USD788 million was disbursed upon approval followed by a USD679.2 million disbursement following the first review.

On January 12,2009, the IMF approved an initial USD2.46 billion, and on June 29,2009, an additional USDl.1 billion

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D. PROGRESS TOWARDS CAS OUTCOMES

12. I n line with the limited scope of the program proposed in the CAS, the ambitions of the results framework were modest, but progress towards both country goals and CAS outcomes has been good. In particular, significant progress was made in improving energy efficiency, the business environment, and PFM. Good progress was made in improving energy self-reliance, the welfare o f Chernobyl-affected areas, and the effectiveness o f social assistance targeting. Progress towards development objectives in projects under implementation continues to be good, and AAA had a visible impact on Government policies and programs. IFC continued i t s advisory operations and invested a total o f USD54 mill ion in seven projects, generating strong development results and growing i t s portfolio in Belarus by 25 percent since the approval o f the CAS to USD95 million. MIGA i s currently supporting an investment o f an Austrian financial institution in the banking sector in Belarus. MIGA’s outstanding gross exposure in Belarus was USD6.7 mill ion on June 30,2009.

Box 2: Key Country Results Achieved During the CAS Period

Strong pre-crisis economic growth (average of 9 percent per annum between 2003 and 2008), tripling per capita income and delivering one o f the highest poverty rate reductions in the region (6 percent in 2008 and extreme poverty at 1.6 percent). Impressive results shown in preserving equality and social welfare, with inequality and poverty levels being one of the lowest in the world. Public debt at low levels (13 percent of GDP at the end o f 2008) as a result o f fast economic growth and prudent fiscal management The energy intensity of the economy reduced by two-thirds since 1992, to 0.32 TOE per dollar of GDP in 2008, much lower than in other CIS countries and approaching levels in countries such as Canada or Finland. Good progress made towards increased energy self-reliance. In 2008 the local fuel share in the fuel balance increased to 18.3 percent compared to 17 percent in 2006. In the housing and utility sector alone, in 2006-2008 local fuel share almost doubled and reached about 27 percent. Economic liberalization started in 2008 brought significant improvements in facilitating economic activities and encouraging private sector development. As a result, the key indicators of ease of doing business in Belarus have significantly improved (from 115 in DB 2008 to 58 in 2010). Social assistance targeting has improved through replacement of poorly targeted privileges-based programs with the targeted social assistance. International assistance has been scaled up in recognition of the country’s significant economic and political reform efforts. Good progress has been made in observance of the IMF program conditions for macroeconomic adjustment.

13. Significant progress was made in increasing the energy efficiency of public sector buildings, as well as more efficient heat and hot water service provision to households in the Chernobyl-affected areas. The Bank supported demand-side investments in the Social Infrastructure Retrofitting Project (SIRP), retrofitting 674 schools and hospitals for better insulation and 232 buildings for improved lighting. Combined with improvements in boilers and substations, these investments saved about 10,300 thousand cubic meters o f natural gas in 2008. Under the Post-Chernobyl Recovery Project (PCRP), an additional 90 schools and hospitals have benefitted from retrofits to improve energy efficiency. In addition to more energy efficient and reliable heat and hot water services for households, the project connected 1,770 homes in eight towns to gas lines, resulting in 3,750 thousand cubic meters o f natural gas fuel savings. The energy intensity o f the economy has been reduced by two-thirds since 1992 and given the continuous progress in reducing energy intensity (e.g., estimated 8 percent reduction in 2009), the country i s on track to meet i ts national target o f reaching the European average energy intensity by 2020.

14. Significant progress was also made in increasing energy self-reliance as indicated by the increase of local fuels in the country’s energy balance. The government has revised a legislative framework to maximize the use o f local fuels and more extensively exploit renewable energy sources such as biomass. As a result o f the country’s efforts implemented through the State Comprehensive Program (2006-1 I), it i s projected that the share

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of local fuels and renewable energy in the fuel mix for electricity and heat generation will increase to 20.5 percent by 20 1 1. In addition, the country has achieved the following results: in 2008, the share of local fuels in the fuel balance increased to 18.3 percent from 17.2 percent in 2006; in the housing and utility sector during the same period, the local fuel share almost doubled to 26.7 percent; and by the end 2008, 74 percent of al l heat boilers in the housing and utility sector used local fuel. The Bank-supported Study on Increasing Domestic Production of Energy Resources in Belarus supported these efforts by assessing wood and peat resources of Belarus, estimating investment needs in fuel supply and energy production, and providing the cost-benefit analysis o f the viability o f large-scale biomass projects, including an estimation o f the break-even price of natural gas. Under the SIRP, a number of biomass-fueled heat-only boilers have been commissioned.

Business Repistration: - Estimated USD46 million in costs to SMEs saved due to reduction in registration time from 20 to 1 day and elimination of start-up capital and notary requirements. - Increase in new business registration o f 300 percent in 2007 (20,269) and 260 percent in 2008 (18,261) compared to 2006 (4,996). Business Operations: -Activities subject to mandatory certification reduced by 40 percent. -800 business-related administrative procedures (AF’) inventoried, of which 15 percent eliminated with a directive in place to reduce a further 25 percent. -Technical inspections, risk management and checklists being introduced for Fire Safety inspections. - Registration of commercial lease contracts abolished.

15. Progress i s being made towards achieving improved water, wastewater and solid waste management services but the benefits of Bank investment operations are largely expected to accrue under the next CAS. Implementation of the Institutional Development Fund (IDF) Grant for Environmental Permitting i s proceeding with a new regulation consistent with the Intergovernmental Panel on Climate Change (IPCC) directive set to be adopted by the Government, as well as a Strategy on the Introduction of Integrated Permits in line with IPCC. This, combined with a functioning Best Available Technology (BAT) Center to regulate a new integrated system o f environmental permitting, i s expected to lead to the reduction o f emissions and pollution, including for water, wastewater and solid waste. Benefits o f the FY09 approved Water Supply and Sanitation Project are expected to accrue starting in FY 10, and a Solid Waste Management Project, planned for approval in FY 10, i s expected to contribute to achieving outcomes during the current CAS period. These adjustments have been reflected in the updated results framework in Annex 9.

16. Progress towards improving the welfare and opportunities for people living in the Chernobyl-affected areas has been good. By connecting households to gas for heating and hot water under the PCRP, the environmental health risks associated with the use o f contaminated firewood have been substantially reduced. No activities related to improving incomes specifically for the Chernobyl-areas are planned, and the results framework has been updated accordingly.

17. Significant progress has been made in improving the conditions for small and medium-sized enterprises (SMEs). Supported by the IFC Investment Climate Advisory Services Project, key reforms have been initiated over the past 18 months, the results of which are highlighted in Box 3 below. In sectors open to private sector participation, IFC supported their development and modernization through direct investments and technical expertise. IFC’s investments in the retail and real estate sectors are expected to increase competitiveness by introducing modem wholesaling, warehousing and retail formats and enhancing the efficiency of supply chains. Using the broad range of Business Enabling Environment (BEE) project achievements to demonstrate the Government’s commitment to reform, IFC Advisory effectively set the stage for IFC investments in Belarus.

Box 3: Results of IFC Advisory Services in Belarus Doing Business (DB): - Belarus’ overall rankine increases to 58 in 2010. from 85 in 2009. 115 in 2008. and 129 in 2007

7

18. By extending loans through financial sector intermediaries, IFC improved access to credit for micro, small and medium-size enterprises (MSMEs). IFC invested USD2.4 mill ion with partners to establish the Belarus Bank for Small Business (BBSB), the first microfinance bank in Belarus. Since the approval o f the CAS, IFC client banks provided approximately 9,400 MSME loans and at the end o f 2008 held an outstanding MSME portfolio o f USD157 million. IFC's investments in the financial sector also helped support the nascent privately- owned segment o f the banking industry with provision o f both funds and accompanying advisory services. IFC expanded i t s Global Trade Finance Program in response to increased demand for trade finance following the prohibition o f cash prepayments for imports by the National Bank (NBRB). Since August 2008, F C approved three trade finance lines for a total amount o f USD23 million; two additional trade lines are planned with a total approval limit o f USD40 million.

19. According to the PEFA assessment, Belarus' budgetary practices are in line with best regional practice. Belarus scored above average in 5 out o f 6 dimensions in comparison with 13 countries in the region, and also scored above average in these same dimensions in comparison with 17 UMICs across 4 regions. Belarus performs well in budget credibility, comprehensiveness and transparency, control in execution and predictability, accounting and reporting, and external scrutiny. However, scores were lower than average for policy-based budgeting, with particular weakness in multi-year perspective in fiscal planning, expenditure policy, and budgeting.

Figure 2: Belarus vs. ECA Average in PEFA Ratings, 2008

20. Progress i s being made towards improving ~~~ -~ - ___^ "--" ~~ ~ _ _ _-_- l_l_l ~ _ - " - targeting efficiency of social assistance programs and broadening them in order to maintain the promised level of social security. In FY09, the Bank launched Crerlltttftb,

f r \t tj gc t

analytical work to assess pension and social assistance policies, and based on this assessment, provided policy advice and shared international knowledge and best

Government. The resulting dialogue has already had an impact on government policies in response to the crisis,

0 ECA AVE

Belarc1s practice on the specific issues that are o f interest to the i?rccauntm

for example, the elimination o f the poorly-targeted Housing and Utility Subsidy which will allow the Government to expand social assistance to the poorest segments o f the population. Further improvements in targeting are to be supported by the DPL.

Prc iiist.r$,iti h c

Coritw1

21. Bank AAA also supported the policy reform dialogue and helped enhance collaboration between the Bank and the IMF. The 2008 Financial Sector Assessment Program (FSAP) Update diagnosed vulnerabilities in the financial sector and stressed the adverse impact o f directed lending schemes on resource allocation, performance o f banking sector and the structure o f incentives in the economy. I t s recommendations have been reflected in the SBA. The Auditing and Accounting Report on Observance o f Standards and Codes (ROSC) made policy recommendations to enhance the quality o f financial reporting, seeking to foster a financial reporting platform conducive to better tax collection, private sector growth and financial stability, and underpinning a transparent and fair privatization process. Together with the FSAP, it also helped inform the DPL program. The Bank's Energy Sector Update helped build an engagement around energy price vulnerability, security, and investment planning. It also recommended the gradual introduction o f structural and institutional reforms in the sector to move from vertically-integrated state-owned utilities to a more liberalized energy market. Positive developments followed the issuance o f the report, including plans for unbundling state-owned energy companies and institutional and regulatory changes. The Bank also launched i t s engagement in agriculture through a policy note, Agricultural Productivity and Competitiveness, which has laid the analytical base for future dialogue.

8

E. ADJUSTMENTS TO THE CAS

22. While the overarching objectives of the FY2008-11 CAS remain valid, adjustments are proposed to respond to the Government’s request for broadening WBG assistance in light of recent reform progress and the good track record established in the implementation of Bank Group-supported activities to date. The authorities have requested a DPL, lending to support their investment programs in the roads and railways sectors, and additional financing for the on-going PCRP on top of support for investments originally planned in the CAS. IFC will continue to follow the broad strategic priorities in the CAS, but will reposition itself to respond to the ongoing economic crisis. MIGA will be open to requests from foreign investors and consider opportunities to support foreign direct investment in Belarus through the provision of political risk guarantees. With these adjustments, the CAS i s consistent with Belarus’ evolving development strategy. The results framework (Annex 9) has been adjusted to reflect the changes in the program, including replacing the original two-pillar structure with three pillars: Delivering Global and Local Public Goods; Entry, Regulatory Reform and Competitiveness; and Public Sector Eflciency and Fiscal Discipline.

23. I n FY10, I B R D ’ s lending program will be increased to include a USD2OO million DPL as well as an investment operation up to USDBO million. For FY 1 1, lending levels will be contingent on I B R D ’ s overall lending capacity, with the possibility o f a further DPL conditioned on progress with structural reforms. Indicatively in an investment-lending only scenario, lending may reach USD250 million; if, however, progress i s sufficient to justify a second DPL, total lending would be modulated to a lower ceiling contingent on the size of the second DPL. The possible operations with indicative lending amounts are listed in Table 5 below. IFC’s investments are expected to reach about USD80 million per year with a continued focus on financial markets, general manufacturing, and agribusiness, and a new focus on energy efficiency lending building on the findings of the 2008 Energy Efficiency Survey.

Table 5: Changes in the Indicative IBRD Lending Program for FYOS-11 (USD m)

CAS CASPR FYOS I FY09 I FYlO I F Y l l Operations

Additional Financing for Social FY08 I FY09 I FYlO I FY11*

Infrastructure Retrofit

Additional Financing for Post-Chernobyl

*Indicative depending on IBRD lending capacity, instrument mix (investment lending only or development policy and investment lending), and progress on structural reforms.

24. The proposed DPL i s critical to support the efforts of the authorities to accelerate and deepen structural reform in order to return to a sustained growth path and mitigate the effects of the crisis. Key priorities in this regard are strengthening the system of social protection through improved targeting, promoting an increased role for the private sector by easing market entry, and improving competitiveness through liberalization of product and factor markets and enhanced financial discipline. The DPL i s proposed as a single operation, however, continued progress on structural reforms and a sustainable macroeconomic framework may open the possibility for a second DPL in FY 1 1 and a more programmatic engagement going forward.

25. Belarus has requested Bank a Trans-European Corridor Road Improvement Project to support regional integration towards Europe. Investment in the transport system i s prioritized within the overall development strategy, which includes integrating with international transportation networks and. seeking out new

9

markets. Belarus i s strategically positioned with key European transit routes linking East and West as well as North and South passing through the country. Trade and Transport Facilitation Audits completed for the Baltic countries and Ukraine highlight the potential role of Belarus as a transit country for the eastern North-South corridor from the Baltic to the Black Sea, although fully exploiting this potential would also require progress in border management and customs practices. The Trans-European Corridor Road Improvement Project would support road upgrading and road safety on this corridor to European standards. The project would also help to modernize road tolling by introducing electronic free-flow tolling systems-which also have an important energy efficiency impact-as well as to help improving the institutional capacity o f Belavtodor, the road agency of Belarus. Analytical support to develop a transport strategy wil l lay the basis for collaboration under the next CAS, including a possible investment in the railway sub-sector.

26. Original lending plans for FYOS-09 have proceeded according to the planned timetable and are implementing satisfactorily. The preparation of the Solid Waste Management Project i s also proceeding according to plans and i s on track for approval in FY 10. Overall portfolio performance continues to be good, with disbursements reaching 16.2 percent in FY08 and 25.8 percent in FY09. Net commitments increased from USD87.6 million in FY08 to USD272.6 million in FY09.

27. Commensurate with client needs, IFC’s investment product mix has shifted to provide more short- term finance, including trade finance and quasi-equity. IFC wi l l focus on projects that: (a) restore investor confidence by creating demonstration effects, (b) preserve and create jobs, (c) support viable business models that can be sustained during the crisis and contribute to economic recovery, and (d) reduce the high concentration of production, tax proceeds and exports in the Belarusian economy. Through i t s increased Global Trade Finance Program (GTFP), IFC wil l continue to work with existing and new clients in order to restore the flow of trade. IFC wi l l continue to support the development of a dynamic private banking sector in Belarus. To this end, IFC wi l l invest in smaller private sector banks and may provide pre-privatization support, working in close cooperation with IMF and the Bank, to one o f the leading state-owned banks that have been selected for privatization. Contingent on the government’s commitment to transparency in the privatization process, pre- privatization investment i s possible replicating IFC’s successful investments and sale in Romania. The scope for energy efficiency lending wil l be explored on a case-by-case basis in conjunction with the work carried out by IFC’s advisory team and may use i t s client banks to provide targeted financing for specific projects in this area.

28. IFC will also continue advisory work to promote investments and improve the business environment. The Regulatory Simplification and Investment Promotion Project i s expected to be launched in early 2010 in response to a Government request for assistance in: (a) improving the business and investment climate, (b) further introducing DB-related reforms, and (c) investment policy and promotion support. In addition, IFC i s conducting pre-project research for an upcoming multi-year food safety advisory project to strengthen the competitiveness of food producers, to facilitate investment in food safety management systems, and to improve national regulations in food safety in accordance with best international practices. This wil l allow Belarus to diversify the destination o f i t s substantial food exports, in particular dairy products, beyond the current concentration on the CIS.

29. The Bank’s AAA program will continue to be important for building dialogue with the government in key reform areas and for bridging knowledge gaps. Core diagnostics are planned in economic policy to build on the 2005 Country Economic Memorandum (CEM), and in public expenditure to identify potential efficiency gains in spending and gradually reduce the state’s economic footprint. The Bank wil l continue to provide TA to increase the effectiveness of social assistance expenditures, support discussion of issues identified in the Agriculture Note, assist privatization efforts, and implement FSAP recommendations. Planned ESW includes a review of energy and heating tariff reform; a study of environmental standards and pricing reform in water and sanitation, and a Transport Sector Review to provide the analytical basis for future lending.

10

F. RISKS AND MITIGATION

30. Macroeconomic risks are sizeable, given the impact of the global economic crisis and the economic vulnerabilities discussed in Section C, Box 1. The primary risks to the macroeconomic adjustment program include: (a) a deeper and protracted deterioration in the external trade and financing environment; (b) inappropriate macro policy responses deviating from the SBA, especially with regard to net international reserve and net domestic asset performance criteria; and (c) unfilled financing gaps in the context of significant external imbalances and constrained access to capital markets.

31. Adherence to a consistent macro policy framework, progress on structural reforms to attract FDI, and measures to address directed lending in the financial sector are the primary mitigation measures. The ongoing SBA will provide the anchor for exchange rate, monetary and fiscal policy measures, while the DPL provides the anchor for structural reform. After a 20 percent devaluation in January, Belarus widened the exchange rate band from +/-5 to +/-IO, leading to a further gradual depreciation to ease balance of payments pressures. As an open economy, Belarus would benefit if the global economy recovers, in particular if growth in Russia picks up and commodity prices sustain their recent increases. At the same time, a double-dip scenario would increase pressure on Belarus’ external finances and require further adjustments in exchange rate and fiscal policies. Conversely, satisfactory implementation o f the SBA would provide the basis for additional support from the WBG as well as other key external sources of financing, such as the European institutions. The dependence of Belarus on external financing from official sources provides some mitigation against the risk o f policy reversal, while the significant upside of deepened reform in terms of attracting private capital provides some incentives to sustain reform.

Should the SBA go off track, policy lending will be discontinued.

32. With the enhanced scope of engagement, implementation risks have increased. The reform agenda confronting Belarus i s large and complex, requiring simultaneous reform of multiple layers of distortions arising from a far-reaching system o f government regulation, administration, taxation, and subsidy. The risk of reversal or inconsistent implementation i s substantial and would affect Belarus’ ability to reach the development objectives targeted under this CASPR. An important test of the Government’s commitment will be the tightening o f budget constraints, allowing loss-making state-owned companies to exit, and relaxing government controls over factor markets.

33. Implementation risks of the Government reform program will be mitigated through continuous dialogue including leading up to the preparation of a new CPS in 2011. Belarus has made conscious efforts to diversify its economy and the range of development partners it works with. The Bank has been able to react relatively fast, based on the trust that was built through AAA (e.g., 2005 CEM). Belarus has indicated i t s strong interest to continue this dialogue. The authorities have published a short-term liberalization program and have consulted a variety of stakeholders, including the business sector, over key elements such as the reduction of entry barriers. This gives visibility to their commitment and the authorities are aware that changing course on reforms would negatively impact their credibility among investors, the IFIs, bilateral partners, and in particular, the EU. The process o f reform will inevitably create some losers as well as winners. The Bank will need to remain attentive to this and be ready to suggest ways to cushion the impact of reform on those negatively affected. The Bank’s Resident Representative to Belarus will support the intensified dialogue with the authorities but also to reach out to a broader group o f stakeholders.

34. The results o f the enhanced engagement proposed in this CASPR will need to be reviewed at the end of the present CAS. This CASPR argues that the window of opportunity to assist Belarus as it embarks on a challenging reform process should be used. Implementation risks remain large even taking into consideration mitigating factors. Staff will return to management and the Board with an assessment of the results o f the proposed enhanced engagement in the context o f the CAS Completion Report.

11

0 U

B F b e v) v)

e

!

I

b

1

1

I P

; i

k

I

I!

0 c) s

J e! U

I

Y c

2

E 0

n - M

& e

VI 3

u c) s e 0 + m

M

r e

.5 I L

M E

Belarus a t a dance 0/0 /09

K e y Development lnd lca tor i

(2008)

Population, mid-year (millio ns) Surface area (thousand sq. km) Population growth (%) Urban population (%of total population)

GNI(Atias method, US$ billions) GNI per capita (Atlas method, US$) GNiper capita (PPP. international $)

GDP growth(%) GDP percapita growth(%)

(most recent est lmete, 2003-2008)

Poverty headcount ratio at $125 a day (PPP, %) Povertyheadcount ratio at $Z.OOaday(PPP,%) Life expectancy at birth (years) infant mortality(per 1000 live births) Childmalnutrition (%of children under 5)

Belarus

9 7 208 -0.2 73

519 5,370

w.750

0.0 0.2

c2 <2 70

5

Adult literacy, male (%of ages 15 and older)

Gross primaryenrollment,male (%of agegroup) Gross pnmary enrollment.female (%of age group)

0 0 0 0 Adult literacy, female (%of ages 15 and older)

Access to an improved water source (%of population) 0 0 Access to improved sanitation facilities (%of population)

Europe 8 Central

Asia

446 23,972

0.2 64

2,697 6,052 11262

6 9 6.7

4 9

70 21

99 96 96 96

95 89

Upper middle

income

824 41497

0.7 75

5,854 7.07

P,072

5.8 5.0

71 21

95 93 m 0 9

95 83

Net Aid F l o w

(US$ millions) Net ODA and official aid Top3donom (in 2007):

Germany Sweden United States

Aid (%of GNI) Aid per capita (US$)

Long-Term Economic Trends

Consumer prices (annual %change) GDP implicit deflator (annual %change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 00)

Population, mid-year (millions) GDP (US$ millions)

Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption eqenditure Gross capitaifomation

Exports of goods and services Imports of goods and services Gross savings

Manufacturing

1980

9.6

I990 2000

8 7 40

8 4 4 0 3 0 4

10 0.3 8 4

.. 88.6 W3.6 85.3

0.0 7l7,l 0 0

0.2 0.0 7,370 P,737

(%of GDP) 23.5 M,2 47.1 39.2 39.2 316 29.4 46.7

47.4 58.8 23.8 8.5 26.5 25.4

46.0 69.2 43.6 72.4 28.8 22.8

2008 '

83

P 0 8

0.2 9

14.8 20.5

2,Q6.0 0 5

9.7 60,30

9.6 44.4 32.9 45.8

54.2 8 7

36.4

618 69.2 28 1

Age dlrtrlbutlon, 2007

Mde Female

15-78

SO44

4548

3 0 3 4

15.19

0 4

6 4 2 0 2 4 p c e n l d tdal popllalon

Under-6 mortality rate (per 1,000)

eo 1 50

40

30

20

I O

0

la90 1995 2000 2001

.8eianr #REF1 OEumpe 6 Csninl Asia #REF(

Growth of GDP and GDP per caplta (%) I

I .I5 I

OS I 85

I -C WP #REF! - WP per capita #REF'

198 0-90 19 90-2 0 00 200 0-08 (average annualgmMh s$l

0 6 -0 2 -0.4 -16 8 6

-40 5 5 -18 9 6 -0 7 116 -0 4 6 0

-0.7 110 -19 0.1 -7.5 8.2

-4.8 6.9 -8.7 119

Note Figures in italics are for years other than those specdied 2008 data are preliminary 6 Aiddataarefor2007

Development Economics Development Data Group (DECDG)

indicates data are not available

19

Belarus

Balance o f Payments and Trade

(US$ rnii/ionsj Total merchandise eqorts (fob) Total merchandise imports (cif) Net trade in goods and services

Current account balance as a %of GDP

W h e n ' remittances and compensation of employees (receipts)

Reserves, including gold

General Government F lnance

(%of GDP) Current revenue (including grants)

Current eqenditure

Overall surpiusideficit

Highest marginal taxrata (YO)

~ a x r e v e n w

individual Corporate

External Debt and Resource F l o w

(US$ millions) Total debt outstanding anddisbursed Total debt service Debt relief (HIPC, M DRI)

Total debt (%of GDP) Total debt service (%of eqorts)

Foreign direct investment (net inflows) Portfolio equity(net inflows)

2000

7,331 6,646 -446

-338 -2.7

Q9

357

44.2 40.8 35.3

0.2

2.110 369 - 6.6 4.7

78 44

2008

33,043 39,155 4,451

-5,049 -8.4

354

3.061

510 47.6 37.4

14

14.780 1509 - 24.5 4 0

35 1 -26

Compoaltlon of total external debt, 2008

Pr i va te Sec to r Development

Time required to start a business (days) Cost to start a business (%of GNI per capita) Time required to register property(dep)

Ranked as a major constraint to business (%of managers surveyedwho agreed)

Access toicost of financing Economic and regulatorypolicyurcertainty

Stock market capitalization (%of GDP) Bank capital to asset ratio (%)

2000

- - - 2000

15.1

2008

31 7.8 21

2007

29.5 23.3

15.9

I Governance Indlcators, 2000 and 2007

Vdca a-d excurlability

Pdlticsl stability

RWa(or /q=W

RUIed Iw

C a r d d uxruptlm

02007 DZWO

0 25 50 75 100

Cantry'r p r c d l s rlnk (OIW) hlghe,rvslusrm#y bdtermlnF

Technology and In f rast ructure

Paved roads (%of total) Fixed line and mobile phone

High techno logy e q o rts subscribers (per W people)

(%of rnanulactured eqorls)

Envl ronmsnt

Agricultural land (%of land area) Forest area (%of land area) Nationally protected areas (%of land area)

FresmvBter resources percapita (cu. meters) Freshwater Withdrawal (billion cubic meters)

C02 emissions per capita (mt)

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent)

Energy use per capita (kg of oil equivalent)

2000

95.6

26

3.8

45 40.6

3,748 2.6

5.9

2.4

2,466

2007

88.6

m

2.7

43 40.2

6.3

3,634

6.5

3.2

2,939

Nota Figures initalics areforyears otherthanthosa specfled 2008dataarepreliminary 9/14/09 indicates dataare not available -indicates observation is not applicable

Development Economics, Development Data Group (DECDG)

20

Mi I I e nni urn Development Goa Is Belarus

with selected targets to achieve between 1990 and 2015 (estimate closest to date shown, #- 2yean)

Goa l 1: halve the rates f o r extreme pover ty and malnutr i t ion Poverty headcount ratio at $125 a day(PPP. %of populatlon) Povertyheadcount ratio at national poverty line (%of population) Shareof incomeorconsumption to the poorest qunitile (%) Prevalence of malnutrition (%of children under 5)

Goa l 2: ensure that children are able t o comple te p r imaryschoo l ing Pnmaryschool enrollment (net.%) Pnmarycompletion rate (%of relevant age group) Secondaryschool enrollment (gross, %) Youth iiteracyrate (%of people ages 5-24)

Goal 3: eliminate gender dispar i ty In educat ion and empower women Ratio of girls to boys in pnmaryand seconderyeducatlon (%) Women employed in the nonagncuilural sector (%of nonagncultural employment) Proportion of seats held bywmen in national parliament (%)

Goa l 4: reduce under-5 mor ta l l t y by two-thirds Under4 mortality rate (per 1,000) Infant mortaiityrate (per lo00 live births) Measles immunization (proportion of one-yearoids immunized, %)

Goa l 5: reduce maternal mor ta l i t y by three-fourths Maternal mortalityratio (modeled estimate, per D0,OOO live births) Births attended by skilled health staff (%of total) Contraceptive prevalence (%of w m e n ages 15-49)

Goa l 5 : halt and begin t o reverse the apread o f HIV/AIOS and o ther majo Prevalenceof HN(%of population ages 1549) Incidence of tuberculosis (per 00,000 people) Tuberculosis cases detected under DOTS (%)

Goa l 7: halve the propor t ion o f people wl thout sustainable acceas to ba Access to an improvedwater source(%of population) Access to improved sanitation facilities (%of population) Forest area (%of totailand area) Nationally protected areas (%of total land area) C02 emissions (metnc tons per capita) GDP per unit of energyuse (constant 2005 PPP $ per kg of oil equivalent)

Goa l 8: develop a global partnership f o r development Telephone mainlines (per 0 0 people) Mobile phone subscnbers (per M) people) Internet users (per 00 people) Personal computers (per DO people)

Education Indicators (K)

50 :L 25

2000 2002 2004 20062007

-Primary net enrolment ratioXREFl

+ Ratlo of girls to boys in primary 6 secondary education XREFl

I Measles Immunization (K of 1-year I old8) 100

75

50

25

0

1 1990 1905 2000 2007 1 W B ~ ~ N S XREFl OEumpe 6 Central Asia #REF1

ICT indicators (per 100 people)

120

100

80

EO

40

20

0

2000 2002 2004 20062007

OAxed + mobile subscllberr #REF' .Internet usem #REF1

Note Figures in italics arefor years other thanthosespecified indicates data arenot available 9/14/09

conomics, Development Data Group (DECDG)

21

CAS Annex B2 - Belarus Selected Indicators* of Bank Portfolio Performance and Management

Pa Of Date 9/21/2009

Indicator 2007 2008 2009 201 0 Portfolio Assessment Number of Projects Under Implementation 2 2 4 4 Average Implementation Period (years) 3.6 4.6 3.0 3.3 Percent of Problem Projects by Number 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount a- 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Number 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Amount 0.0 0.0 0.0 0.0 Disbursement Ratio (%) e 12.6 16.2 25.8 0.5 PoMolio Management CPPR during the year (yeslno) No No No No Supervision Resources (total US$) 72,319.5 128,595.2 114,869.8 208,473.2 Average Supervision (US$/project) 36,159.7 64,297.6 57,434.9 69,491.1

Memorandum Item Since FY 80 Last Five FYs Proj Eva1 by OED by Number 5 0 Proj Eva1 by OED by Amt (US$ millions) 158.0 0.0 % of OED Projects Rated U or HU by Number % of OED Projects Rated U or HU by Amt

40.0 0.0 94.9 0.0

a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only. All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

22

CAS Annex B3 - IBRDDDA Program Summary

As Of Date 9/21/2009

ProDosed IBRDllDA Indicative Lendina Proaram a

Fiscal year Project Strategic Rewards b lmplementation b US$(M) (HhWL) Risks (HIWL)

' 2010 Belarus Development Policy Loan 200.0 H H H Integrated Solid Waste Management Proj 60.0 M M

'2011' Trans-European Corridor Road Improvement 150.0 H H Development Policy Loan 2 100.0 H H Additional Financing for Post-Chernobyl Recovery 30-40 M L

Result 260.0

r

Result Upto 250

Overall Result UDtO 510

"Indicatively and depending on its composition, FY11 lending may reach US$250 million pending progress on structural reforms and the availability of IBRD financing.

23

Annex B3

Belarus: IFC Investment Operations Program

2007 2008 2009 2010*

Commitments (US$m) Gross Net**

Net Commitments by Sector (%) EQUITY

40.83 10.85 0.58 40.83 I O . 85 0.58

5.61 7.24 GUARANTEE 37.47 100 LOAN 17.14 QUASI LOAN 77.24 55.29 Tota I 0 99.99 100 100

Net Commitments by Investment Instrument (%) Equity 5.61 7.24 Guarantee 37.47 100 Loan 17.14 Quasi loan 77.24 55.29 Tota I 0 99.99 100 100

As of March 31, 2010 ** IFC's Own Account only

MlGA Outstanding Exposure (Gross Exposure, $ million) MIGA's Gross Exposure 20.12 13.41 6.71 Share of Gross Exposure 0.4% 0.2% 0.1%

24

CAS Annex 84 - Summary of Nonlending Services - Belarus As Of Date 912112009

Product Cornoletion FY Cost IUS$OOO) Audiencea Obiective

Recent completions Energy Sector Update Impact of Higher Energy Prices Selected Issues in Public Finance PEFA FSAP

Underway Agriculture Competitiveness Note Accounting and Auditing ROSC

2007 120.0 G, D, B, PD KG, PD, PS 2008 40.0 G, D, B, PD KG, PD, PS 2008 51.6 G, D, B, PD KG, PD, PS 2009 G, D, B, PD KG 2009 G, B KG, PS

2009 2009

G, D, D, PD G, B KG, PS

KG, PD, PS

Planned Economic Policy Notes 201 0 G, D, B, PD KG, PD, PS Transport Sector Rewew 2010 G, D, B, PD KG, PD, PS Social Sector Financing TA 201 0 G, D, B, PD KG, PD, PS

a. Gownment, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving.

25

Annex B5: Belarus Social Indicators

POPULATION Total population, mid-year (millions)

Urban population (% of population) Total fertility rate (births per woman)

POVERTY (% of population) National headcount index

Urban headcount index Rural headcount index

Growth rate (% annual average for period)

INCOME GNI per capita (US$) Consumer price index (2000=100) Food price index (2000=100)

INCOMUCONSUMPTION DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highest quintile (% of income or consumption) SOCIAL INDICATORS Public expenditure

Health (% of GDP) Education (% of GDP)

Net primary school enrollment rate (% of age group)

Male Female

Access to an Improved water source (% of population)

Urban Rural

Total

Total

Immunization rate (% of children ages 12-23 months)

Measles DPT

Child malnutrition (% under 5 years) Life expectancy at birth (yeam)

Total Male Female

Mortality Infant (per 1,000 live births) Under 5 (per 1,000) Adult (15-59)

Male (per 1,000 population) Female (per 1,000 population)

Births attended by skilled health staff (%) Maternal (modeled, per 100,000 live births)

Latest single year

1980-85

10.0 0.7

61.8 2.1

71 87 78

21 25

276 109

1990-95

10.2 0.0

87.9 1.4

1,370 1 2

21.8 10.8 33.0

5.5

85 87 83

100 100 100

93 96

88 63 74

19 21

364 131

2002-08

9.7 -0.4 73.5

1.3

18.5

5,380 133 268

27.9 8.8

36.7

4.8 5.2

90 90 88

100 100 99

99 95

1

70 65 76

12 13

330 115

18 100

Same regionlincome group Europe 8

Central Asia

441.3 0.1

63.7 1.7

7,418 133

3.8 4.1

92 93 91

95 99 88

97 96

70 65 74

21 23

304 125 45 95

Upper- middle- income

948.5 0.8

74.8 2.0

7,878 124

3.4 4.5

93 93 93

94 98 82

94 95

71 68 75

21 25

217 133 110 94

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey.

World Development Indicators database, World Bank - 15 September 2009.

26

CAS Annex B6 - Belarus Key Economic Indicators

National accounts (as YO of GDP) Gross domestic product’ 100 100 100 100 100 100 100 100 100

Agnculture I O I O 9 9 I O 10 10 9 9 Industry 41 42 42 42 44 44 43 42 39 Services 49 48 49 49 46 46 47 49 52

Total Consumption 78 71 72 72 71 71 71 71 70 Gross domestic f w d mvestment 25 27 30 31 33 34 33 34 34

Government mvestment 4 4 5 8 8 6 6 6 6 Pnvate mvestment 22 23 25 23 25 28 27 28 28

FApolts (GNFSf Imports (GNFS)

Gross domestic savmgs a o s s national savmgs‘

Memorandum items Gross domestic product 23142 30210 36962 45276 60313 50432 53106 57644 62747 (US% d i o n at current pnces) WI per capta (US$, Atlas method) 2160 2790 3480 4250 5290 5470 5730 5830 6380

68 60 60 61 62 57 57 56 55 74 59 64 67 69 64 62 60 59

22 29 28 28 29 29 29 29 30 24 30 28 27 28 27 27 28 28

kea1 annual growth rates (%, calculated from 00 pnces) Gross domestic product at market pnces 114 9 4 100 8 6 100 -10 2 0 4 0 6 0 Gross Domestlc Income 130 180 127 6 5 167 -43 3 2 4 3 6 2

‘kea1 annual per capta growth rates (%, calculated from 00 pnces)

Total consumption 11 9 8 3 Gross domestic product at market pnces 120 100

Pnvate consumption 150 100

104 8 9 102 139 5 2 143 169 6 2 167

0 5 2 6 -2 3 4 5 -1 4 4 2

4 6 6 0 4 0 5 5 3 3 4 1

‘Balance of Payments (16% millions) FAports (GNFSf 15689 18182 22236 27608 37304 28565 30365 32152 34336

Merchandise FOB 13942 16109 19835 24329 33043 25327 268% 28365 30200 Imports (GNFs)b 17184 17840 23767 30431 41755 32327 33082 34799 37082

Merchandlse FOB 16126 16746 22104 28400 39155 28439 29019 30419 32310

Net current transfers 303 162 205 191 192 509 611 733 879 Resource balance -1495 342 -1532 -2822 -4451 -3762 -2718 -2647 -2746

Current account balance -1167 514 -1448 -3038 -5049 -4761 -3559 -3392 -3684

Net pnvate foreign duect mvestment 163 303 351 1770 2143 1225 2300 Long-term loans (net) -85 66 488 2500 2247 3169 1555 9% 1241 Official 95 94 1 -41 I389 2386 756 621 432

Othercapital (net, incl errors& ommissions) 1345 -344 608 1546 -344 219 309 632 709 Pnvate -179 -28 486 2542 858 784 799 376 810

Change m reservesd -256 -539 I -2778 1003 148 -606 -997 -1579

Memorandum items

kea1 annual growth rates ( YR00 pnces) Resource balance (% ofGDP) -65 1 1 -41 -62 -74 -75 -51 -46 -44

Merchandlse eqorts (FOB) 152 -12 8 3 5 3 2 1 -43 2 8 4 1 4 9 p m r y Manu factures

27

CAS Annex B6 - Belarus Key Economic Indicators (Continued)

Public finance (as % o f GDP at market pr;ces)' Current revenues 441 473 4 8 4 4 9 2 510 435 433 433 431 Current expenditures 364 378 3 7 1 385 374 3 6 2 363 366 3 7 1 Current account surplus (+)or defict (-) 7 7 9 5 113 107 136 7 3 6 9 6 7 6 1 Captal expendture 7 7 9 1 9 9 105 121 a 9 9 0 9 0 8 8 Foreign fmancmg 0 5 0 3 0 0 3 2 0 0 5 2 2 1 1 9 1 3

kbnetary indicators MYGDP 174 191 2 1 9 2 4 1 233 238 238 238 238 Growth o f M2 (%) 479 425 3 9 9 3 4 7 2 8 3 110 106 118 132 F'nvate sector credt growth / 9 3 1 858 7 6 6 1895 9 7 9 4433 1935 2633 7492 total credt growth (%)

%rice indices( YROO =loo) Merchandlse export pnce mdex 1252 1469 1677 1958 2610 2090 2158 2187 2220 Merchandlse w o r t pnce mdex 1174 1227 1349 161.6 1940 1622 1643 1657 1670 Merchandlse terms oftrade mdex 1066 1197 1243 1212 1345 1288 1313 1320 1330 Real exhange rate (US%/LCU)' 875 87 1 850 955 107.0 9 3 2 943 965 96.7

%rice indices( YROO =loo) Merchandlse export pnce mdex 1252 1469 1677 1958 2610 2090 2158 2187 2220 Merchandlse w o r t pnce mdex 1174 1227 1349 161.6 1940 1622 1643 1657 1670 Merchandlse terms oftrade mdex 1066 1197 1243 1212 1345 1288 1313 1320 1330 Real exhange rate (US%/LCU)' 875 87 1 850 955 107.0 9 3 2 943 965 96.7

Real ulterest rates Consumer pnce mdex (% change) 181 103 7 0 8 4 148 126 7 2 7 2 6 2 GDP deflator (% change) 227 I 8 9 108 128 205 9 8 8 4 7 5 6 8

'a GDP at factor cost b "GNFS" denotes "goods and nonfactor services " c Includes net unrequited transfers ezludmg of€iclal captal grants d Includes use o f IMF resources e. Consolidated central government ' f "Lcu" denotes "local currency unts " An mcrease ul US$/LCU denotes appreciation

28

CAS Annex B7 - Belarus Key Exposure Indicators

Total debt outstandmg and 4739 5263 5787 dlsbursed vD3) (LJSSm)'

Net dlsbursemnts (Usam)" 699 25 3104

Total debt servtce (TDS) 680 594 474 (USsm)'

Debt and debt service mdicators

("h) TDO/XGSb

TWlGDP TDSlXGS ConcessionaUTDO

25 7 234 20 7 15 7 I 4 2 12 8 3 7 2 6 1 7 3 1 2 8 2 2

IBRDexposure mdicaton (%) IBRD DSlpublic DS 8 3 9 0 6 9 Preferred credtor DSlpubhc 24 7 12 8 8 8 DS (%.)'

m m DS~XGS 0 1 0 1 0 1

m m m wssmf 59 47 35 Ofwhtch present value o f guarantees (USSm)

Share o f IBRD portfolio (??) 0 0 0

IDA TDO Wssrnf

IFC (USSrn) Loans 36 3 56 3 72 1 Equity and quasi-equlty i c 2 9 3 5 4 1

MIGA

14760 20898 23353 24849 25891 25901

570 5869 2455 1496 1041 I O

1509 1326 1554 2076 3305 4676

39 1 71 2 74 2 73 6 71 4 6-57 245 414 4 4 0 43 1 41 3 38 0 4 0 4 5 4 9 6 1 9 1 12 0 0 8 0 5 0 4 0.3 0 3 0 2

3 9 3 1 4 5 17 4

0 1 0 1

42 258

0 0 0 1 1 1

0 0 0 0 0 0

70 1 57 9 3 9 3 7 2

MIGA guarantees (USSm)

a Includes public and publicly guaranteed debt, pnvate nonguaranteed, use ofIMF credts and net short- term capital

b "XGS" denotes exports o f goods and services, mcludlng worken' renuttances c Preferred creditors are defined as IBRD, IDA, the regional multdateral developmnt banks, the IMF, and the

Bank for International Settlemnts d Includes present value ofguarantees e Includes equity and quasi-equlty types ofboth loan and equty mstrumnts

29

CAS Annex B8 (IFC) for Belarus

Belarus Committed and Disbursed Outstanding invesbnent Portfolio

As of 813112009 (In USD Millions)

Committed Disbursed Outstanding

"Quasi - Partici "Quasi Loan 'GTIRM @ - Loan *GT/RM M AoDroval Comwny - -

2008109 Bbsb 0 211 0 0 0 0 211 0 0 0 2005 Belgazbank 1 5 0 0 0 0 1 5 0 0 0 0 2008 Enlin 0 0 1142 0 0 0 0 671 0 0 0104 Pnwbank 17 92 0 0 136 0 17 92 0 0 136 0 2008 RuMiaskiy 7 0 19 0 0 0 0 19 0 0 2008 ligulllo 0 0 8 0 0 0 0 6 0 0

Total Pottfolio: 26.42 2.11 36.42 1.36 0 19.42 2.11 33.71 1.36 0

Denotes Guarantee and Rsk MaMgement Products *Quasi Equity includes both loan and equity types

30

3 m

MAP SECTION

P O L A N D

RUSSIAN FED.

L A T V I A

L I T H U A N I A

R U S S I A NF E D E R A T I O N

U K R A I N E

To Vilnius

To Alytus

To Vilnius

To Utena

To Daugavpils

To Rezekne

To Nevel

To Smolensk

To Roslavl

To Klintsy

To Chernigov

To Chernihiv

To Chernobyl

To Ovruch

To Klintsy

To Sarny

To SarnyTo

Kovel'To

Chelm

To BialaPodlaska

To Bialystok

To Bialystok

V I T E B S K

M I N S K M O G I L E V

G O M E L

G R O D N O

B R E S T

DzyarzhynskayaHara (346 m)

Dneprovsko-Bugskiy Canal

Viliya

Zakhodoyava Dzvi

na

Sozh

Dnepr

Berezina

Pripyat

Neman

Kobrin

Bjaroza

Baranovichi

Ivattsevichi

Pinsk

Luninets

Lida

VolkovyskSlonim

Casniki

MolodechnoVilejka

Borisov

Talacyn

Berazino

Soligorsk

Hojniki

MicasevicyKalinkavicy

Rechitsa Dobrus

Slutsk

Osipovichi

Bobruysk Dovsk

Zabalocce

Turov

Stolin

Mozyr

Zlobin

Svetlahorsk

Gorky

Orsha

Navapolack Poloysk

Lepel

Krichev

Slavharad

Kascjukovicy

Postavy Hlybokae

Braslau

Brest

Grodno

Gomel'

Mogilev

Vitebsk

MINSK

V I T E B S K

M I N S K M O G I L E V

G O M E L

G R O D N O

B R E S TKobrin

Bjaroza

Baranovichi

Ivattsevichi

Pinsk

Luninets

Lida

VolkovyskSlonim

Casniki

MolodechnoVilejka

Borisov

Talacyn

Berazino

Soligorsk

Hojniki

MicasevicyKalinkavicy

Rechitsa Dobrus

Slutsk

Osipovichi

Bobruysk Dovsk

Zabalocce

Turov

Stolin

Mozyr

Zlobin

Svetlahorsk

Gorky

Orsha

Navapolack Poloysk

Lepel

Krichev

Slavharad

Kascjukovicy

Postavy Hlybokae

Braslau

Brest

Grodno

Gomel'

Mogilev

Vitebsk

MINSK

P O L A N D

RUSSIAN FED.

L A T V I A

L I T H U A N I A

R U S S I A NF E D E R A T I O N

U K R A I N E

Dneprovsko-Bugskiy Canal

Viliya

Zakhodoyava Dzvi

na

Sozh

Dnepr

Berezina

Pripyat

Neman

To Vilnius

To Alytus

To Vilnius

To Utena

To Daugavpils

To Rezekne

To Nevel

To Smolensk

To Roslavl

To Klintsy

To Chernigov

To Chernihiv

To Chernobyl

To Ovruch

To Klintsy

To Sarny

To SarnyTo

Kovel'To

Chelm

To BialaPodlaska

To Bialystok

To Bialystok

DzyarzhynskayaHara (346 m)

22°E 24°E

24°E

26°E

26°E

28°E

28°E 30°E

30°E

32°E

32°E 34°E

52°N

54°N

52°N

54°N

BELARUS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 25 50 75

0 25 50 75 Miles

100 Kilometers

IBRD 33370

JAN

UA

RY 2005

BELARUSSELECTED CITIES AND TOWNS

VOBLAST' CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

VOBLAST' BOUNDARIES

INTERNATIONAL BOUNDARIES